Global wobble may unbalance Swan

Treasurer
Wayne Swan
’s target of a budget surplus faces renewed threats after news of a double-dip recession in the UK, fresh doubts about European austerity measures and weaker US economic data stoked fears a global rebound may falter.

The International Monetary Fund moderately boosted its forecasts this month for global gross domestic product growth in 2012 to 3.5 per cent from a January prediction of 3.3 per cent, but it said the outlook was still “very fragile".

Underscoring that view has been a flurry of negative reports this week, led by news that Britain’s economy fell into its first double-dip recession since the 1970s, after gross domestic product unexpectedly shrank 0.2 per cent from the December quarter, when it contracted 0.3 per cent.

In China, manufacturing may have contracted for a sixth month in April, the longest run since the global financial crisis, according to a preliminary reading of HSBC’s purchasing managers’ index released on Monday. On the same day, a separate gauge showed euro-zone services and manufacturing output declined for a third month in April.

A US report published on Wednesday showed orders in the world’s largest economy for durable goods meant to last at least three years dropped by the most since January 2009. That followed worse than expected non-farm payroll figures for March.

The US Federal Reserve left monetary policy unchanged on Wednesday, saying strains in global financial markets continued to “pose significant downside risks to the economic outlook". The Fed said in its March statement that those strains had eased.

“Wayne Swan would have to be feeling a bit nervous about the global backdrop,’’ said AMP chief economist
Shane Oliver
. Sovereign risk was as intense as ever, there’s a backlash against austerity measures in France and the Netherlands and in the US economic data had been patchy, he said. “It all adds up to a fairly fragile world."

With the budget less than two weeks away, Mr Swan has repeatedly flagged the threat global issues pose and said on Sunday that Australians “shouldn’t be surprised to see bouts of instability in the global economy continue for some time to come".

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Treasury forecasts for global growth published five months ago in its so-called midyear economic and fiscal outlook were for global growth of 3.5 per cent in 2012 and 4 per cent next year. The IMF expected 4.1 per cent growth in 2013, it said last week.

“The global problems make it harder," said JPMorgan chief economist Stephen Walters. “If the global economy is weaker, the mining companies are not exporting as much coal and iron ore and the government’s assumption that revenue will come back gets compromised.’’

Canberra-based budget-modelling company Macroeconomics said in a report out today that the federal budget was on course to generate a cash deficit of $8 billion, or about 0.5 per cent of GDP, by fiscal 2013 if Mr Swan failed to cut spending after 2011’s financial turmoil eroded business confidence and tax receipts.

With global issues buffeting Australian exporters, as well as domestic household and business confidence, local GDP growth is likely to fall short of Treasury’s 3.25 per cent forecast for the current financial year, according to some economists, including Macquarie’s Aimee Kaye, who tips growth of just 2.7 per cent

“One of the key focuses on budget night will be looking at the reason­ableness of the economic projections,’’ Ms Kaye said.

Official predictions for the jobs market were also likely to be revised, Ms Kaye said. The government forecast employment growth this financial year of 1 per cent in November, which would mean employers needed to create another 250,000 jobs by June, she said.

“The GFC was almost four years ago, yet we’re still running budget deficits," he said. “In an ideal world we’d be in surplus by now, getting debt down and able to implement another stimulus package if needed."